Attack of the Killer Contract Clauses

January 15, 2007
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Caryl Sandler Shuham, partner in law firm of Shuham & Shuham, clarifies points on risk reduction in contract clauses for a member of the Mechanical Service Contractors Association who attended her seminar, “Killer Contract Clauses.”

CHARLESTON, S.C. -In general, mechanical contractors need to make sure they aren’t taking on more contract responsibility than they intend to, said a speaker at the Mechanical Service Contractors of America (MSCA) Educational Conference.

Contract forms in mechanical service have two main uses, said Caryl Sandler Shuham, partner in law firm Shuham & Shuham. “First, these written agreements state the price, schedule, and scope of work to be performed by the mechanical service contractor (MSC),” she said. Second, they allocate risks between the MSC and its customer, whether that’s an owner, property manager, general contractor, or construction manager.

Shuham has practiced in the area of construction law for the past 20 years. She has extensive experience in the area of construction contracts, risk allocation, insurance, and bonding. One of her clients is John J. Kirlin Inc., headquartered in Rockville, Md.

Risk allocations can hold a lot of potential pitfalls for the MSC, said Shuham. A seminar she presented at the education meeting focused on the risk-shifting elements of contract forms - the so-called killer clauses.

She cited clauses MSCs should include in their own printed contract forms, and identified contract clauses commonly found in standard, preprinted contract forms provided by customers, for which she suggested revisions “to more equitably allocate risk.”

CLAUSES TO INCLUDE

In standard contract forms, Shuham recommended that contractors include specific clauses for covered equipment, the condition of that equipment, and access to the equipment.

Shuham suggested including these sample clauses for covered equipment that limit and identify the contractor’s liability:

• “The obligation for maintenance under this Agreement shall extend only to Covered Equipment described on the Covered Equipment list attached hereto as Exhibit A (‘Covered Equipment’). Any and all other equipment, functions, and operations are not a part of this Agreement.”

• “Upon written notice to Customer, MSC has the sole option of eliminating from the Agreement any piece of Covered Equipment it finds to be economically unsound for further servicing or repairs.”

• “If this Agreement includes plumbing system services, sewer and drain cleaning is not included.”

Regarding the condition of covered equipment, Shuham suggested the following sample clauses:

• “Customer understands and agrees that Customer’s Covered Equipment must be in good operating condition before this Agreement will take effect.”

• “The annual Agreement price is conditioned upon the Covered Equipment being in maintainable condition. If the initial inspection indicates repairs are required, a firm quotation will be submitted for Customer’s approval. Should Customer not authorize the repairs, MSC may at its option (1) remove the unacceptable system(s), components(s), or part(s) from its scope of responsibility; (2) adjust the annual Agreement price accordingly; or (3) cancel this Agreement.”

Regarding access to covered equipment at the customer’s facility, if gaining access creates an undue expense, the following sample clauses can shift risk to the customer:

• “Customer shall permit MSC free and timely access to areas and Covered Equipment, and allow MSC to start and stop the Covered Equipment as necessary to perform required services.”

• “Customer shall provide sufficient working space, reasonably free of obstacles, in and around the Covered Equipment to enable MSC to perform the services safely and efficiently.”

• “The Customer shall provide parking for MSC service vehicles. Customer shall provide appropriate disposal facilities for belts, filters, and other components changed by MSC pursuant hereto.”

• “The Customer shall furnish necessary water treatment to protect the Covered Equipment.” “This can be a major issue down in Florida,” Shuham said. “Is the problem due to piping or was it lack of water treatment? Does the water meet the manufacturer’s recommendation?”

• “Customer further acknowledges that certain Covered Equipment may have to be shut down in order to make repairs pursuant to this Agreement, and that the availability of parts may affect the period of such shutdown. The Customer shall be solely responsible for obtaining other facilities during such shutdowns.”

PAYMENT CLAUSES

Shuham called payment clauses “nearest and dearest” to the mechanical contractor’s heart and pocketbook. After all, you don’t want to work without pay. Here are a few sample clauses contractors can use to protect their pay interests:

• “Customer will promptly pay invoices within 15 working days of receipt. Should a payment become 30 days or more delinquent, MSC may stop work under this Agreement without notice and/or cancel this Agreement, and the entire Agreement amount shall become due and payable immediately upon demand.”

• “MSC reserves the right to add a 1.5 percent per month service charge to any account outstanding over 30 days.” Shuham referred to this as an interest clause. “You never signed up to be their lender,” she said. “You are not a bank. They should pay you interest of delay.

“If a customer stops pay, can you stop work? Who breached the contract first? Clarify what entitles you to stop working.”

ADDITIONAL CLAUSES

In her detailed session, Shuham also covered “extra work” clauses - those requests for work that fall outside of the original contract scope (extra materials and labor, service calls not covered, replacement of obsolete parts not covered in the contract, and the cost of compliance with environmental regulations, if not covered in the contract).

In addition, an extra work clause may include “any repairs or services associated with such items or events as improper operation; damage caused by electrolytic action; deterioration due to rust, erosion, or corrosion; negligence or misuse of the Covered Equipment; power failures; electrical panels; disconnect switches; circuit breakers; electrical supply lines; water mains; chilled/condenser water and steam lines to the Covered Equipment; leaks in refrigerant piping; failure of tubes whether due to freezing or other failure; floor drains; Covered Equipment cabinets; casings, door seals, or hardware; thermometers; gauges; boiler flue; ductwork; grilles; boiler tubes; refractories; oil or gas heat exchangers; corrosion; the cleaning of any air passages, ducts, or, grilles; or air balancing of Covered Equipment.”

In schedule and delay clauses, “You’re basically explaining to customers that work takes place during regular business hours unless otherwise specified,” she said. When it comes to invoicing for delays, make sure that your clauses are written so that “The burden is on the customer.”

She also covered “Limitations to MSC’s Obligation.”

“Make sure you are not assuming responsibility for the design,” she said. Neither do you want to take responsibility for problems that occur after other companies have been working on the equipment your company installed. “It’s not your responsibility.

“When you’re not aware of an existing problem, this responsibility should not be yours,” she continued. Conversely, if you are aware of it, you have an obligation to let the customer know and possibly to offer solutions, she said.

Insurance clauses, hazardous materials, indemnity, liability - the list of legal protection and potential pitfalls goes on and on.

“Look for opportunities to protect yourself,” Shuham said. You could include a statement that says, “The only thing I’m included in are those that are 100 percent my fault. “The customer will probably try to change that,” she said, if they read it. Not all of them do.

GETTING OUT OF IT

What happens if you feel it’s in your company’s best interest to get out of a contract? Make sure you have a “termination for cause” clause:

• “Should a payment become 30 days or more delinquent, MSC may stop work under this Agreement without notice and/or cancel this Agreement, and the entire Agreement amount shall become due and payable immediately upon demand.” In short, “If they are not paying you, they are in breach,” she said. “The thing becomes due and payable.”

• “In the event that this Agreement is breached by the Customer, the Customer shall be liable for MSC’s incurred cost and such profit as would have been realized by MSC had the Agreement not been breached by the Customer.”

There also are “termination without cause” clauses:

• “Either party may terminate this Agreement by giving 30 days’ prior written notice to the other party.” For example, “Say you had a great guy, as your customer, but he retired and his son took over,” Shuham said, adding, “Oy!”

Of course, there needs to be dispute resolution and attorneys’ fees clauses.

“This is but a sampling of the clauses you may encounter,” she said. “Each of your customers may have other clauses peculiar to their company or jurisdiction. If you are not using your own contract forms, be sure to read the customer’s proposed contract documents and try to negotiate out any language that seems particularly unfair to you.

“If the customer will not budge, you may need to accept the terms on the current project, but try to resolve in advance a better agreement for the future work you will do together.”

In most cases, she said “your proposed changes will not be accepted flat out and you will need to do some persuading. Your negotiating approach is simple. You are merely asking to modify terms that are plainly unfair to your company.

“Though you may need to go a few rounds, your very basic argument of fairness is hard to refute.” The customer may tell you, “We have used this form for 20 years and you are the first to mess with it!” Shuham suggested that the mechanical contractor replies, “We are a strong company with good business skills. We plan to be as thorough and careful in servicing your project as we are in agreeing to contract terms.”

For more information, contact Shuham & Shuham, 1000 S. Pine Island Rd., Suite 250, Plantation, FL 33324; 954-370-9550; 954-370-9559 (fax); www.shuham.com.

Publication date: 01/15/2007

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